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Observations on how public opinion is shaped in the US

Public opinion is observed to be very malleable and fickle. It’s highly susceptible to reshaping by main stream media.

In an unlikely twist of events, what was once presented as a war by the White House against China over trade and national security has overnight morphed to become a fight for American values like democracy, free speech and human rights.

While the ongoing unrest in Hong Kong have provided ample fuel, the tweet by NBA Houston Rockets general manager was the spark that caused the fire.

Related Readings

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List of companies that have been heavily punished by macro economic trends to consider for purchase

The following list of companies have experienced major headwinds in the public markets

Enterprise SaaS Large Cap

  1. CRM
  2. WDAY
  3. VMW
  4. PANW
  5. INTU
  6. RHT
  7. ADBE
  8. VEEV
  9. NOW

  10. TEAM

Enterprise SaaS Mid Cap

  1. TWLO
  2. ZS
  3. MDB
  4. PCTY
  5. PD
  6. DOMO
  7. DDOG
  8. ZM
  9. WORK
  10. TEAM
  11. STMP
  12. DBX
  13. CRWD
  14. DOCU
  15. HUBS
  16. ESTC
  17. ZEN
  18. OKTA
  19. SPLK
  20. ZUO
  21. ZEN
  22. HUBS
  23. NET

China

  1. CTRIP
  2. BABA
  3. JD
  4. BIDU
  5. WB
  6. PDD
  7. SINA

Semiconductors

  1. MU
  2. NVDA
  3. AMD
  4. MCHP
  5. INTC
  6. QCOM
  7. AVGO
  8. XLNX
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Thoughts on excessive use of leverage

One of worst mistakes I made was during the 2015/6 Oil crash. I bought into shares of oil exploration companies instead of buying the oil directly. 

It was a very painful and expensive mistake. While the price of oil made a nice recovery since then, the exploration companies never made it through to the other side. Majority of them filed for bankruptcy during the height of the crisis. Unfortunately they took on too much debt when the times were good and were unable to finance the debts and ongoing operations through the continued sales of their inventory when situations turned south. 

The lesson learned is that when buying the dip, it’s important to make sure that not just yourself but the underlying assets you hold are resilient to the environment shock. Utilization of excessive leverage reduces the resilience. Over expansion into fancy offices and overstaffing is another form of excessive leverage. Tech startup founders are often caught red handed committing these mistakes. 

With regards to oil, until the world stops relying on plastic, chemical lubricants and switches completely to alternative forms of energy, we should not expect the price of oil to fall to zero anytime soon. 

A simple acid test to figure out the intrinsic value of oil is to ask your neighbor for his tank of gasoline for free. The most likely response you will get from him is a suggestion to go f**k yourself…?!?

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Chat with Punit

Private one on one chats over dinner and generally more insightful than listening to talks in conferences.

Areas of focus

Core areas of focus

  • enterprise
  • cloud
  • security
  • SaaS

Exploratory areas for growth

  • healthcare technology
  • fintech
  • gaming

Process

Starts building a model about a space before diving in. After diving in with investments further build out the model. Coefficients for the model include areas:

  • Team processes
  • Product performance metric
  • Market growth

Thoughts on FinTech

Betting on consumerization of the space as opposed to enterprise. Recent move by Charles Schwarb will not likely impact revenue of consumer apps.

Looking for startups focused on the vector that will get them into consumer wallets as well as grow to occupy a much larger portion of the consumer wallet.

When baby happens, need to get baby insurance. Then next would be Will. And then next…

Hedge funds are not suitable for VC investments. Hedge fund managers should look for other types of investors.

On security

CEOs has not much time. Prefer to high a company that is specialized in acquiring security solutions and delegate the problem to them instead. If shit hits the fan, gets to delegate blame. Companies do not remove security solutions but keep on adding on new ones. Its like a bandaid approach. Removing solutions runs the risk of causing bleeding, very dangerous. The recurring revenue is very lucrative.

When it comes to security is not a question of ability to deeply penetrate a system. Its a question of willingness to pay to penetrate the said system.

On machine learning

On public web data, building model based that is based around proven correlations – CxOs tend to leave a company before shit happens.

On offline data, putting in boxes in data centers to track traffic volume in and out of data centers to approximate demands on another company’s servers

Words on the street

VCs are increasingly concerned about governance. WeWork’s founder have basically offload USD500million dollars on the secondary market to other hedge fund managers.

On funding

If the core economic of the business does not work before funding, it will only get worst after funding. This is because the company will need to clear an even higher valuation before new investors will be profitable.

On board operations

Having a lot of big brand name VCs does not necessarily mean that you will have a good board. The board needs to be well round.  The founder needs to be able to align all the members of the board.

Expectation of the fund

Calibrate the needs of the needs of the corporate and the needs of the founders.

Expect governance to be intact. For the founders to truly execute upon what they sold when they raised the money.

Would be happy to even just double their money.

 

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Fluid dynamics within the markets

Approximately 10% of all companies listed on Nasdaq and NYSE fell by more than 10% over the past week. Its like a magnitude 5 earthquake happened and the entire market goes into panic mode.

During this occasion, it is fascinating to observe at a macro level the flow of money within the system.

Sources of liquidity

  • the white house administration has cut taxes over the past 2 fiscal years between 2017 and 2018.
  • the Federal reserve increase money supply through the repo market and by lowering interest rates
  • Central banks around the world lower interest rates
  • the high US dollar signals that money from around the world is flowing into the US market

High pressure areas

  • the price of gold moves steadily upwards
  • the price of US Treasury bonds signaled by the fall in US Treasury yield moves steadily upwards
  • the SnP hovers near all time high
  • Companies classified as value stocks are trading at all time high multiples

Anomalous vacuum

  • Companies classified as growth stocks are trading at huge discounts versus all time highs

Once the psychological impact of the current set of stimulus wears off and assuming the supply of money stays constant within the US market, it is very likely money will start flowing from high pressure areas to fill up the anomalous vacuum described above.

https://trends.getdata.io

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LA trip to visit Johnson

  • Textile and clothing companies need to forecast demand to reduce inventory cost
  • Building a team is the most important thing
  • in times of volatility buy put options on VIX and long Gold
  • Small business owners
    • are supporters of protecting US businesses against intellectual property theft by Chinese companies
    • consider Chinese company methods of manipulating accounting statements fraudulent
    • consider news reported in major news networks to be fake
    • consider Democrats to have given away to many privileges to other countries thereby putting the US economy at a disadvantage
  • Real estate development
    •  Bulk of building materials are imported from China and subjected to taxation
    • put on hold until trade war is over to avoid incurring tariffs as production cost
  • Real estate hard money loans
    • usual fees
      • 2% transaction fee
      • 10% annual interest rates
    • Preferred customer fees
      • 1% transaction fee
      • 9-10% annual interest rates
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Book summary: Invest with the Feds by Robert R Johnson, Gerald Jensen and Luis Garcia Feijoo

Types of federal monetary policy environment

  • Expansive
  • Indeterminate
  • Restrictive

Expansive monetary policy

  • Small cap companies benefits by gaining easier access to credit for expansion
  • Mortgage REITs experience lower interest rate expenses and improved profit margin
  • cyclical sectors will tend to outperform during this period – tends to have high beta
    • autos
    • construction
    • manufacturing
    • technology

Restrictive monetary policy

  • Small cap companies will experience more difficulties raising capital to fund expansion as compared to blue chip companies
  • Equity REITs will outperform Mortgage REITs during this period
  • Commodities will out perform in a restrictive monetary policy environment aimed at curbing inflation – especially industrial metals

Consistent performance across all monetary policy environment

Tends to have low beta

  • energy
  • utilities
  • food
  • financing
  • consumer goods

Stages of business cycles

  • Early stages
  • Late stages

Early stage of business cycle

  • Technology and transportation will outperform

Late stage of business cycle

  • Consumer staples and energy will outperform

International strategies

  • Scandinavian countries have the least correlation against US economy
  • Scandinavian countries has the least amount of debt to GDP versus
    • US
    • other European countries
  • Scandinavia countries have a higher savings rate
REITs returns versus Stocks and Bonds across various monetary policy environments
Strategy returns across various monetary environments
Commodity returns and asset class returns in various monetary policy environments
Sector returns in various monetary policy environments
Sector beta

 

 

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Chats with Ilya on hedge funds

  • Management fees are too high to be sustainable for funds sized below 300 million
  • Funds sized above 300 million tend to have a shelf life of 10 years
  • staying motivated and dedicated to the business is hard when you already have a lot of cash
  • funds that last for a long time have founders who are absolutely focused on building up an institution that will sustain beyond the founder
  • it is much more lucrative to build and own the system than to be working in the system
  • Sharpe ratio above 1.5 is acceptable
  • SnP Sharpe ratio tends to be really low
  • important to figure out how to still generate returns in a down market
  • qualitative assessment of the business model is what drives outsized investment returns
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Evening out watching Rambo, last blood

From Sujit on trading

  • not necessary to get numbers further back than six months
  • stock market subjected to fractal distribution
  • it is possible to generate returns of up to 140% per year by trading on stocks that are moving within a range
  • going all in on each position each time leads to a very low Sharpe ratio
  • Sharpe ratio should be calculated separately for method and for SnP benchmarked against US treasury interest rates. The difference is the actual returns

On Rambo Last blood

A movie is a reflection of the culture and attitude of an age. Rambo was a very popular cultural icon during the eighties and the early nineties when memories of the Second World War and the Cold War against the communist were still very fresh in the minds of the people in America.

If you looked at the world today through the eyes of someone like Rambo, you would have been able to easily draw facts to back the narrative painted by Trump prior to being elected president.

When operating in an environment of uncertainty, a decision maker formulates multiple often competing narratives in the head that best explains majority of the facts presented. He calibrates the weightage assigned to the probability of each narrative as new pieces of data become available. He simultaneously utilizes multiple ones that are assigned high plausibility in his decision making to strive for the best possible expected outcome . It is a cognitively demanding iterative activity that goes on indefinitely.

  • common themes between movie and Trump’s narrative
    • Mexico drug cartels
    • Mexico prostitution rings
    • The world is a dark place
    • illegal border crossing
    • poor border fence
    • white male
    • Rust belt
    • Protagonist is in his 70s
    • Freedom fighter who fought the communist in Vietnam and Russia
    • guns and lots of blood
    • man of steel
    • manifest destiny
  • Cognitive biases
    • Narrative fallacy
    • Framing bias
    • selective bias

Related readings

  • Expert political judgement, Philip Tetlock